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China’s gilded gold market

Much of the growing gold demand has been driven by individuals

By

FuTao

SunYanxia

BEIJING (Caixin Online) — At 350 tons per year, China is the world’s largest producer of gold. And yet China’s statistics show that the country has been a net gold importer since the 1990s. Gold imports and exports have been tightly controlled by the People’s Bank of China, though new avenues for investment have emerged in recent years.

Marcus Grubb, the managing director of investment research and marketing for the World Gold Council (WGC), in June said that the world gold price had yet to fully internalize the additional demand that China’s investors and consumers were bringing to the table.

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At the time, the WGC had just published figures that showed China’s demand for gold surpassing that of India for the first time. This has led many to ask where China’s gold market is headed next and to wonder how China’s expanding gold imports might apply upward pressure to global gold prices.

Silence golden at PBOC

One gold investor joked: “If the central bank were to signal that it was going to buy gold, the price would reach $2,000 overnight.”

China’s government has in fact made moves in recent years to diversify its foreign exchange holdings and increase the size of its gold reserves. The impact is marginal, though. China’s gold reserves grew from around 600 tons in 2007 to 1,054 tons in 2009, a scant 1.6% of its foreign reserve holdings.

In March 2010, Deputy Governor of the People’s Bank of China and head of the State Administration of Foreign Exchanges, Yi Gang, said that gold would not and could not become a significant part for China’s foreign reserve holdings, as the world gold market is limited and any large-scale purchase by the PBOC would significantly raise the global price of gold.

Gold Heading to $3000?

Brett Arends explains on The News Hub why he thinks Gold could soon hit $3000 an ounce as he compares the meteoric rise in the precious metal to the bubbles in the Nasdaq and real estate.

This is accurate. Trying to transfer just a fraction of China’s $3 trillion in foreign reserves into purchasing gold would be like trying to fit an elephant in an ice box.

This helps to explain why, in the face of the United States’ and Europe’s current debt crises, the PBOC is still putting one third of foreign reserves into the United States’ Treasury bond market. Even in the midst of the credit downgrade by Standard and Poor’s, China added an additional $5.7 billion of U.S. Treasury bonds to its portfolio in June.

Personal investment bubble

Chinese individuals’ demand for gold mostly comes in the form of jewelry or bullion. WGC statistics show that jewelry purchases in China accounts for 142.9 tons and has increased by 21% year on year in 2010, and bullion purchases are at 90.9 tons, having increased 123%. China’s total demand for gold has increased steadily, averaging a 14% increase every year since 2001, according to the WGC.

When discussing the “China factor” in the gold market, it is important to remember that much gold buying in China is speculative in nature and prone to fluctuations. “The power of the herd mentality in the Chinese gold market is very strong among investors,” said one gold market analyst.

Since January of this year, China has seen four QDII gold funds established one after another. QDII, Qualified Domestic Institutional Investor, allows financial institutions on the mainland invest in offshore markets in a limited capacity. QDII funds have attracted successively lower demand since the first offering. The first QDII fund raised around $3.2 billion when it was established and has since shrunk to $1.5 billion; the Jiashi Fund, established in August, only raised $570 million.

Short-term selling pressures

Gong Shanqiang, analyst at precious metals firm CGS, also believes that short term profit-seeking might lead to pressure to sell in the gold market and that gold merchants in the coastal regions of China are already facing pressure to buy-back gold. Gong said “the price is already very high, so investors can now resell their purchases and make tidy profits.”

Gong points to recent activity in Shanghai’s gold exchange as evidence of new bearish tendencies: “In the short-term, the gold market might suffer for a while.”

But Gong does not look on the gold market with pessimism. He thinks that, if loose monetary policy in the United States does not change, a third period of quantitative easing (QE3) might stimulate the gold market.

“The key is in the next six months. September is the beginning of the traditional peak season for gold buying in India, and if you add China’s investors into the mix then it’s entirely possible that demand will expand at the end of the year.” Read this report on Caixin Online.

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